Wednesday, February 27, 2013

The version of Fiona Apple's "Get Him Back" on the official release is pretty good, but this unreleased version might be even better. You can also easily find live versions on youtube. The dark, concise story that it tells powerfully combines outwardly directed anger with inwardly directed insight.

The paper makes 3 recommendations: (1) apply marginal tax rates that are both graduated & higher than present law to very high earnings (e.g., perhaps 70% for the top 1%, which kicks in at about $400,000, (2) for low-earners, subsidize earnings but then apply high marginal tax rates in the phase-out rate, (3) what the paper calls “capital income” should be taxed.

Herewith some thoughts about Topics 1 and 3. (It is already a bit on the long side without including Topic 2, on which in any case I had less to say.)

1. Optimal tax rates for high-earners

1. The fact that this paper talks about higher rates at the top, perhaps on the order of 70 percent, is a valuable public service. Whether or not one agrees in the end (or thinks it politically feasible even if one agrees), it expands the range of “permissible” debate, and this is a good thing both intellectually and politically. Diamond and Saez are also to be commended for caring about real world policy debates, as opposed to wanting to play with complicated mathematical models for their own sake (which can be fun, but is less public-spirited).

2. The paper argues that the tax policy aim with respect to people at the top should be almost pure revenue maximization, without regard to the marginal disutility that a high tax rate imposes on them (via both taxes paid and deadweight loss). More specifically, it shows that assuming a very low social weight for these marginal utility losses, rather than a zero weight, wouldn’t change the conclusions very much.

Two grounds are offered for this low social weight: low Ui, and low wi. The former refers to the affected taxpayer’s marginal utility. For example – to draw on someone well above the merely $400,000 level – Warren Buffett probably would experience next to no change in his daily personal circumstances if his tax bill went up by $10 million – it’s not as if he’d have to cut back on anything that he likes doing. By contrast, low wi refers to the social weight that one places on Buffett’s, as opposed to someone else’s disutility. Some versions of welfarism – but not utilitarianism – give less weight to the welfare of people at the top than people at the bottom.

In terms of the robustness of the paper’s conclusion, it makes a big difference which of these two factors one is relying on. For example, it is, not obvious that Ui is effectively zero until one is well above the $400,000 level. Someone at the level very likely can think of things to do with an extra dollar that would be relevant to personal welfare. By contrast, low wi in the social planner’s mind for everyone in the top 1% takes care of the problem all by itself. So a utilitarian, who treats wi as the same for everyone, cannot as easily agree that pure revenue maximization is the proper aim until one gets closer to the Warren Buffett level.

I personally find utilitarianism more persuasive than the versions of welfarism that use egalitarian weighting, although I also view declining marginal utility as a very real and significant phenomenon. (I am aware, of course, that many others view it more skeptically than I do.) Utilitarianism necessarily follows if one favors (as I do) the Harsanyi framework, in which one looks behind the veil and seeks to maximize expected utility under the hypothetical assumption that one is equally likely to be any of the people in the society. In consequence, I may need to go somewhat higher than $400,000 of annual income before I am ready to sign on to setting marginal tax rates based purely or mainly on revenue maximization.

3. Today’s extreme high-end wealth concentration really re quires us to think about the possibility of resulting externalities. The paper doesn’t discuss externalities, and understandably so as they are very hard to evaluate, much less measure precisely. However, they may be very important. Indeed, significant negative externalities from extreme high-end wealth concentration could reasonably lead a utilitarian to support marginal tax rates at the top that were actually above the revenue-maximizing level (just as a pollution tax may be set above the revenue-maximizing point, given that its aim is to price the harm appropriately).

Negative externalities to high-end wealth concentration could relate to the effects on relative status and social power, and in particular on political economy concerns. A society with an exceptionally wealthy elite that has, in effect, taken a rocket ship away from everyone else may be especially prone to rent-seeking and destructive insiderism. It gives us the astonishing politics of a Great Recession in which Washington seems not to care about persistently high unemployment. These types of concerns might conceivably call for a more than revenue-maximizing rate at the very top, insofar as the behavioral response was to earn less rather than simply do more tax planning.

In fairness, I should note that there are also claims of positive externalities from high-end wealth concentration. Suppose, for example, that exceptionally wealthy consumers fund the development of new technologies that at first are prohibitively costly for everyone else, but over time become cheaper and result in greater consumer surplus being enjoyed by the bottom 99 percent (be it from something like HDTV or advances in healthcare).

4. The paper suggests that the proper response to high-income taxpayers’ greater tax planning ability is simply to broaden the base, expand anti-tax planning rules, and increase enforcement efforts. All those are perfectly good suggestions, and the paper is right to observe that the availability of tax planning is somewhat endogenous to the design choices we make. But I would think that tax planning flexibility is almost bound to be greater for high-earners, especially (though not uniquely) under a realization-based income tax. After all, they are bound to have greater flexibility, liquidity, and risk tolerance, along with access to better advice, than everyone else. This probably needs to be kept in mind when evaluating what is likely to be the revenue-maximizing rate at the high end.

2. Taxing capital income

1. The paper devotes a lot of time to arguing that “capital income” should be taxed. I found this discussion baffling, because I do not regard “capital income” as a coherent category. OK, we can talk about the usual things (a la the Jake Brooks paper in Week 3) such as returns to waiting, risk, embedded labor income or inframarginal returns, etc. But in practice it seems to mean “income of people who happen to be at least incidentally using some capital.”

I gather that what the paper has in mind is categories that tend to be classified as “capital income” under current income tax law. For example, income earned by or through corporations, along with dividends and capital gains. But only a fool would argue that, say, support for a consumption tax approach means that we should exempt those items under our existing system. That would mean in practice that, say, Steve Jobs would have gotten classified as a very poor individual who only earned $1 a year. (I gather that the paper is expressly meant to respond to fools who are making such arguments, however.)

When people discuss whether we should tax “capital income,” what they typically mean is the risk-free return to waiting, which a well-designed income tax reaches and a well-designed consumption tax generally exempts. Again, the paper appears to be responding to the fact that idiots write Wall Street Journal op-eds in which they argue for exempting capital gains, corporate income, and dividends under the existing system. But I wasn't convinced that an article in the Journal of Economic Perspectives needs to respond to Wall Street journal op-ed writers who are aiming at the broad public rather than at JEP readers.

2. Once we are talking about “capital income” under the existing system, it becomes a bit questionable whether we can really have a 70 percent rate, as the other part of the paper argues. The revenue-maximizing rate for capital gains, under the existing system with its realization requirement and tax-free step-up in basis at death, is probably more on the order of 30 percent. Likewise, taxing dividends and corporate income generally at 70 percent might be more than a bit questionable. To be sure, the paper does say that “capital income” doesn’t necessarily have to be taxed at the same rate as everything else, just not at zero given (among other things) the difficulty of telling the two types of income apart. But this certainly was not the best-developed part of the paper.

3. The paper criticizes the well-known (in the public economics literature) Chamley-Judd and Atkinson-Stiglitz-based lines of argument, to the effect that the return to waiting should be taxed at zero. The Chamley-Judd literature shows that a positive tax on waiting leads to exploding tax rates on greatly deferred consumption, which becomes a major problem if you have infinite-lived consumers (such as multigenerational households) optimizing over unlimited time. The paper rightly argues that relevant time perspectives are likely to be a lot shorter. The Atkinson-Stiglitz literature shows that, if it is most efficient to tax alternative commodities the same, then one can fruitfully think of present consumption and future consumption as involving alternative commodities. Taxing future consumption at a higher rate is inefficient, at least at this particular choice margin, because it distorts the inter-temporal choice.

The paper says: Ah, but reliance on Atkinson-Stiglitz to support exempting the return to waiting requires that consumers be homogeneous with respect to saving. Another way of putting the point is that, although the inefficiency at the margin is clear, there may be other reasons for taxing the return to waiting, e.g., in response to heterogeneity.

4. Before turning to those other issues, a general background point is worth making. Optimal taxation is about how best to respond to an information problem (since we lack information about ability and, underlying that, marginal utility). So of course information about people’s saving, or the relative timing of earning and consumption, is potentially relevant. A consumption tax that treats this as irrelevant is failing to use potentially pertinent information. Of course, this by itself doesn’t tell us if/when saving should increase or reduce one’s lifetime tax liability in present value terms.

4. The paper notes a couple of good arguments that potentially make it plausible to tax saving. In particular:

(a) saving may be a “tag” that is correlated with ability. Even as between two individuals with the same observed earnings, the saver may have other attributes (e.g., foresight, planning depth, and self-control) that translate to being better-off in ways that cannot be directly observed.

(b) the income effect of saving means that one can better afford to reduce one’s labor supply – in effect creating a negative revenue externality from saving that undermines use of the tax system to provide insurance against earnings volatility.

5. Getting back to the first point in this section, no good argument for a positive tax rate on the return to waiting arises from the difficulty in distinguishing between labor income and capital income. No good consumption tax model requires so distinguishing. For example, if you use expensing as under the Blueprints cash flow consumption tax that David Bradford and the Treasury Tax Policy staff developed in the 1980s, the issue disappears altogether. Same point if one uses the X-tax. If anything, administrative arguments weigh heavily against continued use of the income tax, especially if it relies on realization.

Tuesday, February 26, 2013

Last Wednesday (February 20), I participated in a lunchtime panel session at NYU Law School about the fiscal cliff deal, the sequestration controversy, and how we should think about tax reform and long-term budget policy. My colleagues on the panel were Rosanne Altshuler, Josh Blank and David Kamin. You can view a complete video of the session here.

Monday, February 25, 2013

Suppose, just hypothetically, that you were scheduled to take Flight A from New York to Chicago, followed by Flight B from Chicago to Champaign, IL - say, on American Airlines, although I suspect the policy is universal. Then you re-route other travel so that you will already be in Chicago and don't need Flight A. Suppose you call up the airline to cancel Flight A, so that they won't cancel the entire rest of your roundtrip reservation when you don't show up for it.

The question I want to ask is: Do you get hit with a change fee? If you had a nonrefundable, etc. ticket, do they charge you, say, $150 for "changing" your itinerary, when the only thing you are doing differently is LESS of the same?

Friday, February 22, 2013

Not to be self-centered or something, but my concern about the sequester has just shot up exponentially for wholly selfish reasons.

Yes, I already knew that the sequester is one more example of how dysfunctional our political system is. I mainly blame it on the Republicans' taste for brinkmanship in support of policy choices that the American public opposes. They contested the 2012 presidential election on the grounds that they are pushing in the sequester fight, and they decisively lost despite getting millions of votes from people who don't actually support their program of cutting Social Security and Medicare rather than allowing any high-end tax increase. (What they agreed to in the fiscal cliff deal was actually a gigantic tax cut, relative to 2013 law on the books, and this was indeed crucial to their accepting it.)

We saw in the debt limit fight, before the Republicans decided to fold, that what they actually want is not to cut Social Security and Medicare, but to force President Obama to propose cuts that they can then "accept" and then use subsequently as campaign fodder against the Democrats. Demanding that the other side propose the cuts you actually want, so that you can subsequently campaign against them, is a pretty high ask, even for extortionary bargaining.

Anyway, I knew how foolish this whole battle is, and that it is likely to cost about 700,000 jobs along with associated disruption. But only belatedly have I woken up to my own short-term stake in the sequester. Without quite endorsing Mel Brooks' view that it's comedy if it happens to you and tragedy if it happens to me, I will admit that personal stakes tend to focus one's attention.

I have two quick business trips coming up right around the zero hour. On February 28, I am flying through Atlanta to Tallahassee in order to attend an FSU Law School conference on the 100th anniversary of the income tax, at which I will be presenting my Henry Simons paper. That trip should be fine - there's always a chance of bad weather, but probabilistically the odds of a big blizzard are declining as we march through this grim and gray February. (OK, admittedly it's sunny right now, albeit much too cold.) But then on March 1 the sequester hits. On Saturday, March 2, I am scheduled to fly through Atlanta back to NYC, arriving quite late. On Sunday, March 3, I fly out again, through Chicago to Champaign, Illinois, where on Monday, March 4 I am presenting my Social Security and Medicare paper as this year's speaker at the annual Ann Baum Lecture at the U of Illinois Law School. Then that night, I fly back through Chicago to NYC, where the next morning I am co-teaching the NYU Tax Policy Colloquium (and I am indeed the lead discussant for that day).

I'm also using multiple airlines - Delta for the Tallahassee trip, and American Airlines for the trip to Champaign, even though I usually fly United. Without the sequester it all should work out, but as things stand one really wonders.

I certainly share the general view that neither side in the Washington standoff has any current choices that it prefers to letting the sequester hit with full force on March 1. And if that happens, airplane delays will be highly likely - the New York Times says that the furloughs of federal airport personnel will make it just like a bunch of really bad weather days. And even if the Administration could scramble to make all this less bad - which they might not have the legal discretion to do - that may not be their preferred course. The drama of people like me fuming as they sit on the floors of overcrowded airports may be considered preferable to the slower and less visible drip-drip-drip of misguided meat-cleaver austerity.

It will be more interesting than I'd really like to see how all this ends up playing out.

UPDATE: I've decided to tempt fate less, as I see it, by flying from Tallahassee to Chicago and leaving out the intermediate NYC stop. But there is still plenty of room for the travel gods to toy with me again.

Wednesday, February 20, 2013

Gary and Sylvester don't appear too worried either about the sequester or indeed much of anything else. Despite their vigorous play at various hours of the day and night (being still just seven months old), you can see that they are still getting their beauty sleep, and that it is definitely working.

Today, along with Rosanne Altshuler, Joshua Blank, and David Kamin, I participated in a lunchtime discussion at NYU of the sequester and associated issues (what happened earlier this year, what might happen over the next few months, what ought to happen in tax, spending, and budget policy). All of us were skeptical or worse about the desirability of abrupt spending cuts in the current macroeconomic climate, the desirability of any immediately implemented deficit reduction in the short term, and both the likelihood and desirability of 1986-style tax reform in which one broadens the base but gives away the net revenue by lowering the rates.

My closing words were something to the effect of: Things may conceivably get a lot better for our country over the next few years, but if so it will be despite, not because of, our political system.

UPDATE: There may be a video of this event available soon, in which case I will plan to post a link.

Monday, February 18, 2013

Today I am at Tulane Law School to present a lunch talk (Presidents' Day notwithstanding) regarding my paper, Should Social Security and Medicare Be More Market-Based? I've made slides for the 50-minute talk regarding this paper that I will be presenting at the University of Illinois Law School on Monday, March 4 (two weeks from today), which I'll post in due course, but I won't be using them today anyway, as the format is more NYU Tax Policy Colloquium-like (Shu Yi Oei will present or summarize the paper, and I'll then offer a brief response before we move on to discussion).

Our next NYU Tax Policy Colloquium session won't be tomorrow, but the following Tuesday (Feb. 26), as NYU follows a Monday schedule tomorrow to make up for the Monday holidays. The speaker will be Peter Diamond.

Meanwhile, I am stunningly close, at long last, to completing my book Fixing the U.S. International Tax Rules. It's taken me four years, and four fresh starts after the initial one. I've never had this experience before - all my books have gone pretty fast once I had conceptualized them - but this time I struggled with the proper normative framework and analysis, reflecting that the defects in the literature have forced me to do a whole lot of fresh thinking (not comparably necessary, say, when I wrote my book Decoding the U.S. Corporate Tax).

My international tax book will be discussed in a conference at Hebrew University Law School this coming June. I will also need to look for a publisher. I had been thinking that I might like to use the Urban Institute Press, which published Decoding, but their publishing operations have apparently been scaled down. A good university press is presumably the best way to go. I hope and believe that the book will have significant readership and sales, with good potential for use by classes, both in law schools and elsewhere, that are studying tax policy and/or international taxation. But it certainly isn't aimed at mainstream commercial publishers.

Thursday, February 14, 2013

Anyone who has seen me in the last 7 weeks or so could observe that I grew a beard over the Christmas vacation. Just about everyone kept telling me that I looked like Lincoln, or else Daniel Day Lewis playing Lincoln. This morning I shaved it off, so now (although I don't have a mirror in front of me at the moment) I am pretty sure that I look like this.

Wednesday, February 13, 2013

Yesterday at the colloquium we discussed Lilian Faulhaber's above-titled paper on certain recent tax cases in the EU and their possible broader implications. The cases concern tax benefits for charity, such as deductions by donors for charitable gifts. The European court, which in a distressing instance of acronym inflation has redubbed itself the CJEU (Court of Justice of the European Union) in lieu of being just the ECJ (European Court of Justice), also appears to have gotten badly muddled in adjudicating issues that, if they arose in the U.S. involving federal constitutional challenges to state-level tax rules, we would say involved claims of discrimination against interstate commerce. As many commentators have noted, the EU's "four freedoms" jurisprudence amounts to pretty much the same thing, at least if you also throw the "right to travel" in the U.S. Constitution.

This is a much vexed area in both U.S. and European jurisprudence. I weighed in on one piece of it more than twenty years ago in an AEI monograph, "Federalism in Taxation: The Case for Greater Uniformity." Used copies are available from Amazon, and indeed you can choose between the paperback edition, available for 1 cent here, and the hardcover, which is available for $139.75 here. Perhaps your choice will depend on who's paying, But I digress. In this monograph, I argued, mainly on political economy grounds, for income tax base conformity in state income taxes, even though variation in tax rates is a healthy aspect of fiscal federalism.

Just one more preliminary point before we get to the matter in hand. It's often said, with good reason, that one of the big problems in academics is that no one takes the time to read anyone else's work. This is overstated, of course, but by no means wholly untrue. The problem is that, when there's some big dispute in a topic that isn't closely related to your own current research interests, then, even if you know you ought to look into it more closely just to stay up-to-date, the opportunity cost of taking the requisite time can feel prohibitive. I am therefore unfortunately not in a position to determine what my own take would be (if fully versed) on a recent U.S. tax academic debate about CJEU tax jurisprudence - the smackdown (so to speak) between Michael Graetz and Al Warren on the one hand, and Ruth Mason and Michael Knoll on the other hand.

As partly summarized here, Graetz and Warren argue that the then-ECJ has been blundering around in a "labyrinth of impossibility" in its anti-discrimination tax jurisprudence, because it can't or won't coherently choose between "capital export neutrality" (CEN) and "capital import neutrality" (CIN) in assessing challenges to a given tax rule. Thus, suppose Germany has a higher tax rate than Italy, and there is some issue concerning cross-border investment from Germany to Italy. If the CJEU adjudicates the dispute by picking a supposed comparable out of a hat and then asking whether the provision at issue is discriminatory, we know one thing for sure. The investment CAN"T be taxed the same both as a low-tax purely Italian investment, and as a high-tax purely German investment. So once the court has picked its preferred comparable (without explaining its choice), it has effectively dictated the outcome of the inquiry, without either providing useful guidance for the next case or persuading savvy readers that it actually has a coherent rationale in mind.

The underlying point is that "neutrality" across all margins is impossible, once Germany and Italy don't have the same tax rules in all relevant respects (i.e., both rate and base). Now, if I were a CJEU judge, even leaving aside the fact that I think CEN and CIN are worthless standards, the use of which should be discouraged and perhaps even criminally punished (OK, I'm exaggerating here for effect), I'd like to think I could do better. In my view, an often key focus of the inquiry should be, not into the phantom of neutrality at one arbitrarily chosen margin or another, but rather into the underlying political economy concern that countries (or U.S. states) may be overly inclined to engage in covert protectionism. But this is neither to claim that this rubric will prove suitable all the time, nor that it will always yield clear answers, nor to dispute the Graetz-Warren analysis both of what the CJEU has actually been doing, and of the impossibility of developing any single-bullet approach that will be consistently satisfying even just on efficiency grounds.

Knoll and Mason argue that the CJEU both can follow a coherent standard and has in fact done so, based on an inquiry into what they call "competitive neutrality,” which, in the labor market setting, "prevents states from putting residents at a tax-induced competitive advantage or disadvantage relative to nonresidents in securing jobs." Graetz and Warren respond skeptically regarding both the efficacy and the actuality of this claimed single-bullet approach.

Anyway, on to yesterday's paper. Faulhaber convincingly argues that the CJEU has blundered in assessing claimed "four freedoms" violations in 4 related charity-related contexts, the easiest of which to parse is the following. In a case called Persche, the CJEU ruled that Germany could not deny charitable deductions for donations that provided alms in Portugal, given that it would have allowed the deduction had the alms been provided in Germany. This supposedly burdened the "free movement of capital."

To see how misguided this is, suppose we agree up front that the charitable deduction is a subsidy for doing good things (positive externalities, public goods creation, etc.) - rather than being an aspect of measuring income. Some people like to spend money in fancy restaurants, others like to give it to charity, and both expenditures are instances of consumption by the donor. Doing one rather than the other offers no differentiating information regarding how well-off one is, what is likely to be one's marginal utility of a dollar or Euro, etc. Or to put it differently, I might want to insure behind the veil against my having low rather than high earnings ability, but it's hard to see why I'd want to insure against having a taste for charitable giving rather than for something else. So the only potentially satisfying rationale for charitable deductions is to encourage and thereby increase the amount of the gifts.

The benefit of getting the deduction is therefore akin to what we often call "spending," to use the wrong but more popular terminology than the one I prefer (which is that it's an "allocative" rule that's been placed inside a mainly "distributional" system). So, if Germany has a 33 percent marginal tax rate and allows charitable deductions, my gift of $150 to a charity ends up costing me $100 and Germany $50. It is therefore effectively identical to the case in which Germany offers 50 percent matching grants for charitable gifts, so I directly give the charity $100 and Germany throws in an additional $50.

There is absolutely no question that Germany has, and under principles of fiscal federalism should have, the right to spend tons of money on its own, say, public schools, while spending zero on Portugal's public schools. So why should the outcome be any different just because Germany chooses to use the charitable deductions technology in a particular case? The only difference of real interest is that Germany, when it uses the charitable deduction, is effectively decentralizing the decision process regarding who gets what, permitting taxpayers to decide where particular Euros from the Germany Treasury go, at the price of being willing to put some of their own skin in the game. This might be a good technology or a bad one, in one setting or another - a topic that has its own little literature, and which we've covered in past years' colloquia, but it has no discernible relationship to the "free movement of capital." So the CJEU is chasing phantoms of supposed discrimination, and is merely arbitrarily burdening the use of a particular form of "spending."

In the U.S., by the way, though the issue is apparently unclear, states should have no constitutional difficulty in limiting charitable deductions to in-state activity, although many do not bother to do this, as they simply "piggyback" onto the federal measure of such deductions, which of course permit, say, a New Yorker to claim a charitable deduction for giving in Montana. And obviously, the federal charitable deduction itself is automatically operative across state borders. But as it is implicitly federally financed, this does not create a potential "race to the bottom" problem between New York and Montana in their willingness to allow what I would call subsidy spillovers.

There is a U.S. Supreme Court which held that Maine could not deny charitable deductions to in-state charitable activity that mainly benefited out-of-staters who were visiting. But that is very different from saying that Maine would be required to subsidize wholly out-of-state activity, just because it was providing subsidies in-state.

Faulhaber's paper nicely analyzes the underlying problem. One minor disagreement is that the paper frames the issue as one of "negative harmonization," and compares it to the issue of the EU's developing a "common consolidated corporate tax base" (CCCTB), which is an example of the approach I endorse in my AEI paper of creating identical tax bases even if there are different tax rates. But I regard these issues as quite different. For example, in the charitable deduction setting, no one is suggesting that all EU countries must "harmonize" their rules in the sense of having the same rule - rather, they are just being forbidden (however misguidedly) to adopt one particular approach that supposedly is improperly discriminatory. And once you have fiscal federalism in mind, no general case for greater rather than lesser harmonization emerges (e.g., my argument was founded on particular political economy claims).

Where else might the same problem arise in subsequent CJEU jurisprudence? Faulhaber notes that, say, home mortgage interest deductions that were limited to in-state would tend not to create the issue, because if a German buys a house in Portugal he or she probably becomes a Portuguese resident. But tax benefits for vacation homes, which the U.S. allows, might create the issue. The analysis is not necessarily the same, however, depending on how one parses the rationale for the tax benefit.

Likewise, suppose a U.S. state offered itemized deductions for a resident taxpayer's medical expenses, but only if they were incurred in-state. I would be far more skeptical of this than of allowing an in-state limitation for charitable deductions. The difference is that the medical deduction is probably best rationalized as a distributional rule (since healthcare outlays are relevant to wellbeing and marginal utility, even if unrelated to measuring "income"). So this would be less akin to, say, subsidizing only one's own public schools rather than those everywhere in the country, and more like, say, New York's deciding that only the cost of buying New York apples (rather than those from Michigan) can be deducted by New York State apple juice producers.

Perhaps, however, I am proving the Graetz-Warren point by resorting so freely to argument by analogy. These generally are not issues with clear and easy or first-best answers.

UPDATE: In discussing the Graetz-Warren verus Knoll-Mason debate in the literature on the CJEU, I appear to have given less than equal time to the latter side (although I was trying to be clear about not taking a stand). Just to even things out a bit, here is a link to an article in which Ruth Mason further explains her view of what the CJEU has done and could do.

Monday, February 11, 2013

Scheduling travel from New York City to - well, anywhere - can be a bit chancy during the winter months. I learned this once again last week in connection with my trip to USC Law School to present my paper, The Forgotten Henry Simons, at a conference there, organized by Nancy Staudt, commemorating (whether or not celebrating) 100 years of the U.S. federal income tax.

(As per my previous post, you can find the article here, and a pdf version of the pptx slides for my talk here.)

The conference took place last Thursday and Friday (February 7-8), validating once again (at least from a selfish point of view) my decision a couple of years ago to shift the NYU Tax Policy Colloquium from Thursdays to Tuesdays. This way, I have at least a sporting chance of attending conferences that meet at the end of the week without running into direct conflicts unless the weather gets really bad.

The last time I went to USC to give a talk - at a budget conference organized by Beth Garrett and Howell Jackson some years back - I ran into the same problem of a gigantic East Coast snowfall impeding my return. That time around, I ended up getting home 2 days late, after various flight booking adventures that took me through Chicago and Washington on my way back to New York City.

This time, at least the process was a little smoother. I found out last Thursday, right after I finished my Simons presentation, that my flight home on Friday had already been canceled. Rebooking was delayed, and I correctly guessed that United would be getting me back to NYU no earlier than today (Monday). So I jumped on Expedia and bought a flight home on Sunday via San Francisco, which worked pretty well although I didn't get home until after midnight.

Comical tension right at the end, as I struggled to complete the purchase on my laptop immediately prior to the start of a talk at the USC conference by Larry Summers. I had visions of Summers getting annoyed if he saw me pounding away on a laptop during his talk, instead of listening to him. And I didn't want to wait the 2-plus hours until the talk plus follow-up festivities were done, as I suspected that the best remaining tickets were going fast. Indeed, even by the time I started the Expedia process some of the better tickets had already been sold. But it all worked out.

Fortunately, my extra time in L.A. was not wasted, given friends there. Indeed, I got to visit both the Norton Simon Museum, for the first time ever, and Disneyland, for the first time since 1989 or so.

The reason I hope the weather gods are satisfied now is that I have several trips in the offing. On Monday, February 18, I am scheduled to give a lunch talk at Tulane Law School, in New Orleans, regarding my paper, Should Social Security and Medicare Be More Market-Based? On Friday, March 1, I am presenting my Simons paper at an FSU Law School conference commemorating 100 years of the income tax. On Monday, March 4, I am presenting my Social Security / Medicare paper as the annual Baum Lecture on Elder Law at the University of Illinois Law School. Both of the latter two trips (to Tallahassee, FL, and Champaign, IL) require changing planes, and I'll be returning to NYC in between them as it would take two changes of plane to get from Tallahassee to Champaign. Thus, there is plenty of scope here for further travel disruption if the weather continues to be bad. Perhaps I should sacrifice a placatory goat to Qimasch, or Ahshqi, or whomever else is the operative unruly spirit?

While my recent working paper, "The Forgotten Henry Simons," is fairly short and punchy, these slides, which I used to organize my talk on the paper at the USC Law School Tax Conference last Thursday, are shorter and punchier still.

I felt that the presentation went off pretty well, and was glad to see that legal historians in attendance thought that it was interesting.

Wednesday, February 06, 2013

Today I flew to Los Angeles, where tomorrow (Thursday) I will be presenting my paper on Henry Simons at a USC Law School tax conference commemorating 100 years of the income tax.

If I do say so myself, this is not only one of my shorter papers but (I think) a fairly entertaining one, in which I tried for more flair than seems appropriate for some other topics. I have prepared fairly punchy slides conveying the high points, which I will post here when I get a chance, probably early next week.

Looking forward to seeing lots of old friends at the conference.

UPDATE: My talk went well, but due to the East Coast storm I am stranded in L.A. through Sunday, rather than heading home on Friday.

Fiona Apple's new album, which I like, got me listening to her previous records, which I also like. Heartfelt, piano-pounding singer-songwriters aren't always my thing. But if you compare her, say, to Carole King, not only does she do pretty well (although King at her early peak was great), but it even makes the modern era come off pretty well compared to back then. Apple is fanciful and all over the place in a good way that one might not have found from her precursors, or at least the commercially viable ones.

Here's a version of one of her best songs, from the Letterman show, with an amusing but somewhat sad short interview at the end.

Yesterday we discussed Jake Brooks' above-titled article on income and consumption taxation (available here). It's situated in a literature that is very familiar to tax academics, but much less so, unfortunately, to students who are new to the field. This is the Domar-Musgrave literature concerning whether an income tax, and/or a consumption tax, can in theory tax risky returns.

The standard models that are used always involve a risky asset (e.g., one that might with equal probability reap a 30% profit or a 10% loss) plus a risk-free asset with a very low but certain return. One might start with the portfolio allocation that the taxpayer would prefer in a no-tax world, then we impose the tax, which lowers the after-tax gain and loss from the risky asset, in effect providing insurance against the variance that the taxpayer evidently didn't want. One can then demonstrate, that if the taxpayer responds by holding more of the risky asset and less of the risk-free asset (and, if necessary, borrowing at the risk-free rate in order to hold more of the risky asset, she can wholly undue the insurance effect. Under the consumption tax, she can get back to exactly where she was before. Same story under the income tax, except that her after-tax return is reduced, even after the portfolio shift, by the product of the risk-free rate and the income tax rate on the entire portfolio (even if the taxpayer ends up holding no risk-free assets).

Moral of the story in the standard account: neither tax affects risky returns, and the only difference between the two is that the income tax reaches the risk-free rate of return. So that is the fundamental difference between the two systems.

Obviously, this is a very abstract and simplified presentation (and I haven't even actually presented it here), with lots of underlying assumptions. Among other things, one assumes that the tax (either one) has a flat rate and allows full loss offsets (that is, net losses are refundable at the tax rate). The reason for that assumption, which obviously doesn't hold for real world income tax systems, is that one is trying to look at what the choice of tax base does, not at what the actual system does in light of its various features (such as rate structure and treatment of net losses) that are distinct from the tax base choice as such.

I think that almost all of the underlying issues can be demonstrated much more simply. Suppose you and I had wanted to bet $1 million on the Super Bowl. But then it turns out that gains are taxed, and losses are refunded at a 50 percent rate. (Forget about the rule in the actual Code that gambling losses are disallowed, reflected that they are viewed as a cost of consumption - the Super Bowl bet is a stand-in for a business venture, although in this example it's a financial instrument with counter-parties, rather than a one-party bet against Nature.) The obvious thing for us to do, given that we apparently want to bet $1 million after-tax, is to cancel out the seemingly mandatory insurance by betting $2 million, rather than $1 million.

Under either an income tax or a consumption tax with a 50 percent rate, we end up in exactly the same place, i.e., with $1 million in after-tax stakes. Question that I'll hold off on for a moment: Is there anything wrong with that? But to complete the picture about income taxes versus consumption taxes, suppose that bettors need collateral to secure their potential obligations, and that the income tax, but not the consumption tax, places a very low fee on the amount of the collateral. (Which, by the way, would not increase under the revised bet if capital markets were functioning well - and there is no point to speculating about the hyper-counterfactual question of how well they actually would function in this fictional world.)

Jake's paper reflects the view that it's unfortunate if taxpayers can negate the mandatory insurance by scaling up the bet. This would be a difficult view to defend if we think purely in terms of consumer sovereignty - that is, by supposing that the two individuals know what is best for themselves and that there are no externalities. However, one can imagine lots of reasons why we might not want to let them fully scale up the bet, if there indeed was any way we could prevent it (which of course appears implausible under the terms of the hypothetical, but can't as easily be ruled out for more complicated real-world circumstances that we actually care about).

For example, suppose the bettors misunderstand the risks they face, or are systematically over-confident. Or suppose that some people usually win the bets and others usually lose, due to "ability" differences that we can't otherwise observe. Or suppose losers will end up on the dole. Or suppose that the bets create a socially costly diversion of effort from genuinely productive activity to unproductive "arm's races" between bettors to outsmart each other. (This relates to a real-world story about the stock market, in which investors have a strong incentive to try to trade based on new information one second before everyone else learns it.)

For any of those reasons, we might be glad if the tax system was able to prevent the bettors from wholly undoing the otherwise mandatory insurance that it provides. (It is a tradeoff, however, if there is also deadweight loss from limiting the bettors' ability to do what they want.) And again, in the real world circumstances that are actually relevant - including, for example, graduated rates, loss limits, and incomplete financial markets - retaining an after-tax impact may actually be feasible.

OK, so much for the basic story. What about income tax versus consumption tax? The paper argues that the former has better chances than the latter of limiting scale-up to reverse out the insurance feature of both taxes. I tend to disagree. Stated in terms of my little story with the Super Bowl bet, the paper makes two arguments. First, the income effect of the tax on the collateral will make the bettors more risk-averse. As they are poorer, they no longer want to bet as much as $1 million after-tax. The paper also calls this voluntary reduction in the size of the bet a "tax." However, I wouldn't call it a tax, as there's no burden from adjusting one's behavior to do what one wants given one's circumstances. I also question treating the shift from a consumption tax to an income tax world as having income effects, since one might expect them to be budget-equivalent. The paper offers some responses to this view, and readers are invited to judge for themselves.

Second, the paper argues that investor departures from full rationality in the standard neoclassical sense may lead to incomplete cancellation of the insurance under an income tax, but not (at least to the same degree) under a consumption tax. Thus, in terms of my example, suppose that the bettors really hates losing more than $1 million from a given "transaction" before-tax, even though after-tax should be all that matters. Then in both scenarios they might be reluctant to scale up fully. But suppose further that, in thinking about the "transaction" to which they apply this pre-tax loss aversion, they score the income tax's collateral fee as a part of the overall return. Then they will scale up a bit less under the income tax than under the consumption tax.

Obviously, my little hypothetical will not help us to think about whether, in the analogous real world situations that the paper actually has in mind (where the tax on the risk-free return from the entire portfolio is playing this role), this is an important and realistic element indicating that the income tax and consumption tax, in their real world versions with all the departures from the hypothetical's assumptions, will actually play out differently. I am skeptical, but again you can read the paper if you want a contrary view.

Tuesday, February 05, 2013

I've long been interested in Richard III, whose very striking (as well as sensitive and thoughtful-looking) National Portrait gallery portrait in London helped inspire Josephine Tey's enjoyable The Daughter of Time. Thus, I was delighted by the news of the apparent finding of his skeleton beneath a Leicester, U.K. parking lot.

Today, the researchers issued a pictorial reconstruction of his face, from work on the skeleton. For my money, it looks a lot like the painting - further evidence supporting its authenticity, if the researchers weren't cheating, which admittedly might be a concern. (Note: All existing paintings of Richard were done some years after his death, but, due to similarities between them, it's believed that they may reflect a common source, such as a lost contemporaneous painting.)

You be the judge. The first one is the painting from the National Portrait gallery, while the second one is the reconstruction:

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.